Assignment ECO202 02

Topics: Recession, Keynesian economics, Macroeconomics Pages: 3 (656 words) Published: June 14, 2015
Submit a 4- to 5-page paper that addresses the following questions. Be sure to use references within the paper to support your answers. Show work for all calculations.

1. According to Okun's Law, if the normal rate of growth of GDP is 3% and the current unemployment rate is 6%, an increase in GDP growth to 4% would cause unemployment to change by what percentage? Okun's Law state the relationship between GDP and unemployment. Okun's states a theory that when the unemployment rate falls to 1% there is the increase in the GDP to 3%. So, according to this if the normal rate of growth of GDP is 3% and the current unemployment rate is 6%, an increase in GDP growth to 4% would cause unemployment to change by 0.33% percentage

2. When total output, income, employment, and trade decline for 6 to 12 months, the economy is in what part of the business cycle?

When these real variables decline, the economy is in the recession phase of the business cycle. Recession is the period when output, income, employment, and trade decline. The downturn is last for 6 months or more which causes in the contraction in the business activity in the different sectors of the economy.

3. Which has a larger effect on aggregate demand: an increase in government expenditure or an equal sized decrease in taxes? Explain your answer.

Decrease in taxes has a small effect on aggregate demand than increased government expenditure. Spending and taxation are the two levers available to the government for setting fiscal policy. In expansionary fiscal policy, the government increases its spending, cuts taxes, or a combination of both. The increase in spending and tax cuts will increase aggregate demand, but the extent of the increase depends on the spending and tax multipliers.

The government spending multiplier is a number that indicates how much change in aggregate demand would result from a given change in spending. The government spending multiplier effect is evident when an...
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